Monday, October 05, 2015

For the Advanced Croesus Rights players

Alright, now that you've read the basics here, you can progress to more advanced stuff.

Nicholas Nasim Taleb (NNT) is my favourite modern philosopher and it's a good thing that he dabbles in the market too. His concept about antifragility - to make it out better when crisis strikes and not merely to survive it - is enlightening. So with regards to the rights exercise of Croesus Retail trust, how do we best capitalise on this?

First, you need to know the Theoretical Ex-Rights Price (TERP), which is the theoretical price of the stock after all the rights exercise. Since the price of the Croesus is about 80 cts (plus minus 1 ct), let's just say it's 0.80. The rights exericse states that you'll get 22 rights shares for every 100 mother shares @ 61 cts each. Hence the TERP = (0.80*100 + 0.61*22) / (100 + 22) = $0.766. Bear in mind that this is all theoretical and the TERP will vary according to which starting price (I picked 80 cts) you choose. I like to choose the price when the counter goes XR, but there's really no reason why you couldn't choose others.

Why is it important to know the TERP? To maximise your benefits from the rights exercise, you need to get as low a price for the shares as possible. This usually means you want to get as many rights shares at 61 cts as you can possibly get in order to get an average price per share below the TERP if possible. And there are 3 ways to do so:

1. Get as many mother shares before XR as you get. The more mother shares you have, the more entitled rights shares you will get, based on the ratio of 22:100. This is a lousy way to do so because it will give you proportionally the number of right shares, not more and not less. Anyway, Croesus went XR last Fri, so this option is not available anymore.

Scenario 1: I have 1000 shares which I bought at 87 cts, so I'm entitled to 220 rights @ 61 cts each. I'm a casual rights participant, and I just want to get it over and done with. Before 23rd Oct, I go to the ATM and pay $134.20. I will now have 1000 + 220 = 1,220 shares. 

My average price is : (1000 * 0.87 + 220 * 0.61)/1220 = $0.823 per share

2. Buy more nil paid rights during the nil-paid rights trading period. During the nil paid rights from 9th Oct to 19th Oct 2015, you can buy or sell the rights that you are entitled to. If you have 100 mother shares, you will have 22 entitled rights that have not been subscribed or paid for yet. Some investors, for whatever reasons, might choose to subscribe partially or not at all. So this period is important for these people to sell. Otherwise, if you don't subscribe by the closing date (23rd Oct 930pm by ATM), the nil paid rights will be rendered worthless.

This is so important, so let me repeat. If you do not wish to subscribe for your entitled rights (in our example, the 22 nil paid rights), you need to sell it between 9th Oct to 19th Oct. If you don't sell it, you'll just lose money that you're entitled to. You also need to pay brokerage like the trading of normal shares.

Now here comes the interesting part. You can choose to buy more nil-paid rights during the trading period also. If the TERP we calculate initially is $0.766 and the rights shares are priced at $0.61, then the nil paid rights should also trade at $0.156 (0.766 - 0.61 = 0.156). The equation is this:

Price of nil-paid rights + 0.61 = TERP

Now, the theoretical price of nil paid rights is $0.156, but the market price varies according to sentiments. If the price of the nil paid rights on the market is trading at less than 0.156, then it represents a good buy. If the price of the nil paid rights is trading at more than 0.156, then it represents a good chance to sell off any that you don't wish to subscribe. But remember, in total, your total nil paid rights = (entitled nil paid rights + nil paid rights bought during trading period). You need to subscribe by paying for both before 23rd Oct.

Scenario 2: I have 1000 shares which I bought at 87 cts, so I'm entitled to 220 rights @ 61 cts each. During the nil paid trading rights period, I saw that the nil paid rights are trading at $0.150, which represent a good value. I proceed to buy 200 shares at $0.150. Before 23rd Oct, I subscribe by ATM for all the entitled rights (220 shares) and nil-paid rights that I bought (200 shares), paying a total of $195.2 (420 x 0.61 = 195.2).

My average price is : (1000 * 0.87 + 200 * 0.150 + 420 * 0.61)/1420 = $0.814 per share (does not include cost of brokerage incurred when buying 200 shares @ $0.15)

3. Apply for excess rights shares. There will be people who do not want to subscribe to it and people who wants more of the rights units because it's cheaper than the mother shares. You can apply for more than the amount of shares allocated to you. For example, if you have 1000 shares and you are entitled to 220 rights, you can go ahead and apply for 500 rights shares. During the subscription period before 23rd Oct, you need to pay 500 x $0.61 = $305 first. The 380 shares that you are not entitled for but nevertheless applied for is called the excess rights.

But subscribing more doesn't mean that you will get all. Priority is given to those who wants to round off their odd lots. Since the board lot size is reduced from 1000 shares to 100 shares, there is less rounding to do. Those excess rights shares that you applied and paid for without success will be refunded to you automatically to the bank account that your ATM is tied to.

For hot counters (possibly this one), there's really no point subscribing for more than the amount of lots that you have. If you have 10 lots initially, you will likely not get more than 10 lots of excess. My rule of thumb is just to put in twice the amount of money that you are entitled to. If you have 1000 shares, you're entitled to 220 shares and you have to pay $134.20. Just apply 440 shares (220 allocated and 220 excess), paying $268.40 will be more than sufficient to 'tikam'.

Scenario 3: I have 1000 shares which I bought at 87 cts, so I'm entitled to 220 rights @ 61 cts each. I want to apply for excess rights and I hate odd lots, so I applied for 80 more excess rights through the ATM @ 61 cts each and paid $134.20 (for the entitled 220 shares) + $48.80 (for the excess 80 shares to round up a lot of 100 shares), giving a total of $183. Assuming I got all the excess 80 shares that I applied for, I effectively have 300 shares @ 61 cts each (220 + 80 = 300).

My average price is : (1000 * 0.87 + 300 * 0.61)/1300 = $0.810 per share

4. If you don't have any mother shares of Croesus, rights exercise present an excellent opportunity to enter before XR. Since the counter went XR last Fri, this option is no longer available, but for educational sake, let's just run it through.

You generally want to buy enough mother shares before XR so that you have the number of excess rights furthest away from one round lot of 100 shares. The table below shows some of the 'correct' number of mother shares you need in order to maximise the number of excess rights needed for rounding. Since priority is given to people who need to round off their odd lots, it's wise to maximise the number of excess rights needed for rounding, so that you will have the greatest probability to get them at a cheap price of 61 cts each.

As a counter example, If I have 4500 mother shares before XR, I'll be entitled to 990 rights. To round it to one full lot, I just need 10 shares, so that's not really good. 98 is the highest ever you are going to get based on the 22:100 ratio. For those mathematically inclined, the number of mother shares to own before XR to maximise shares for rounding is (5000n - 900), where n are the positive integers beginning with 1.

Again, this option is no longer available since Croesus went XR last Fri, so don't do it. With the board lot size changed from 1000 shares to 100 shares, this is getting less significant too.

Scenario 4: I've heard of Croesus but have zero shares now. I'm excited because Wong Fei Hong also have it. I want to maximise the number of excess rights that I have. Since greater priority is given to people who applies for excess rights to round their odd shares, I want to buy mother share now before XR so that I can have the maximum number of excess rights. Hence, I want to buy 4,100 mother shares so that my entitled rights is 902 shares. This will ensure that the chances of me getting 98 excess rights @ 61 cts is given the highest priority.

Before XR, I bought 4,100 shares at $0.81. I'll then be entitled to 902 nil paid rights. Before 23rd Oct, I go and pay up $550.22 for my 902 entitled rights and also subscribe for another 98 excess rights for $59.78, paying a total of $610.

My average price is: (4100 * 0.81 + 1000 * 0.61)/5100 = $0.770 per share (does not include cost of brokerage incurred when buying 4,100 shares @ $0.81)

In summary, regardless of which options or combinations, it's important to remember the following basic rights information:

1. Nil paid rights entitled to you need to be subscribed by paying 61 cts before 23rd Oct. As for the nil paid rights bought during the nil paid right trading period between 9th and 19th Oct, you will need to pay brokerage fees AND also to pay 61 cts before 23rd Oct. Failing which, it will be worthless after 23rd Oct. In fact, any nil paid rights not subscribed will be worthless.

2. If you don't want to subscribe or choose to subscribe partially, you need to sell off your entitled rights during the trading period from 9th to 19th Oct. Failing which, it will be worthless after 23rd Oct.

3. Any transactions using brokerage platform need to pay brokerage fees. Any transactions using ATM need only to pay a service fee of $2, if I recall correctly. Hence, there's brokerage fees to be paid for nil paid rights bought or sold during the trading period and there's no brokerage fees needed to be paid for application of excess rights because it's done over the ATM.

4. The difference between excess rights, nil paid rights entitled to you and nil paid rights bought during trading period is this:


Whowillbe said...


I thought that it was a bit misleading to use 0.80 (XR price) n use it to calculate the TERP.

The reason why the proce fell from 0.83 to 0.80 on the day it XR is to reflect the TERP price.

la papillion said...

Hi whowillbe,

May I know why you think it is misleading? It's supposed to be illustrative of the way terp is calculated as I've also highlighted that using different values will result in different terp values.

Whowillbe said...


Yeah I understand what you mean. But because you used the price of 0.80 and you mentioned that it was XR price, to calculate the TERP.
I do understand what you are saying and you have many examples given to actually make your points rather clear. But for a less experienced investor, they might be a bit confused and think that associate the TERP to the XR price.

Perhaps it might be more efficacious to use the price 0.86 when Croesus announced the rights issue and then illustrate how the TERP of 0.815 (as mentioned in the press release) was obtained.

But let me say that other than this very small issue (yes my apologies, I should have said that it was a small issue), this post is still very informative for your readers. Good job!

la papillion said...

Hi whowillbe,

Hmm, okay, I'll adopt your suggestion. Will adjust it later, thanks for your keen eyes!

Rolf Suey said...

Hi LP,

Superb post!

May I know how to buy the Nil pay rights?
Normal trading platform we have or go atm?

la papillion said...

Hi Rolf,


You can buy it from any brokerage firm. I'm just not sure which counter name it is though. Should be some R inside one lah.

SMK said...

I chose a different path. Sold at 87.5 cents.should have sold at 89.5.

la papillion said...

Hi smk,

That's a good one. Any intention to get it back cheaper?

SMK said...

will have leave it up to the market to decide. plenty of fish out there. doesn't necessarily have to be CRT. it was a good buy. time will tell if it was a good sale.

at the moment, USD had a quick wobble down in valuation vs major currencies. and the US shares have rallied. HSCE had a good run back into a wedge too. I am starting to have a feeling we will see good movement down only in Jan.

so if the markets give a chance, rebounding off the next dip into the supporting trendline, i might just have no choice but to accumulate for the short term.

la papillion said...


Ah, I see..thanks for sharing your views :) My view is that short term it's bullish, med to long term bearish. If it goes up, I'll sell some. If it goes down, I'll buy more.

SMK said...

haha no need for thanks, i am not saying anything. these are all things you would know.

LepakInvestor said...

Hey LP,

Who is this Wong Fei Hong fella? Is that a stand-in name for Tan Ah Kow?

la papillion said...

Hi lepakinvestor,

Not gng to reveal it! Haha!

If you're dying to know, find my email and ask me there! LOL